In this article we will discuss about the types of economic activities. The activities are:- 1. Business 2. Industry 3. Commerce 4. Trade.
Economic Activity Type # 1. Business:
Business is an economic venture. It involves regular production and exchange of goods and services. Business is carried with a clear intent to make money by offering want satisfying goods and services to customers. Business tries to create customers and help them get what they want in terms of variety, price, quality etc. The environment in which business is carried out is very risky. You may have to fight competition. You may be forced to push rivals to the wall.
At times, you may have to sell below cost. Howsoever tough the environment could be, you have to serve customers quickly, efficiently and effectively, (e.g. Remember McDonald’s). You must be better than the best in the field. You must be prepared to face the music whenever things go wrong. The path of business, in any case, is not a rosy one. Problems of various kinds may hit business operations from time to time.
Let us examine these issues in greater detail:
1. Sale, Transfer or Exchange of Goods and Services:
Business involves sale, transfer or exchange of goods and services for a price. The exchange process is undertaken with a view to make money. Growing vegetables for consumption of a family is not business; but if you begin to sell them in the market place regularly for a profit is business. Business, it must be remembered, is not done out of charity or desire to help people or to meet personal ends.
2. Dealings in Goods and Services:
Business is there to offer want satisfying goods and services. Customers generally buy those that they want at various price points. It is for the businessman to find out what the customer wants and make an attractive, mutually beneficial offer. Obviously customers will not buy what you intend to sell unless they see value in the offer (top quality, economical price, discounts, price offs, concessions etc.) Likewise you cannot sell anything and everything and at every place. So every businessman must choose well in advance what to sell, where to sell, how to sell and at what price to sell.
3. Regularity and Continuity in Dealings:
For a business, the show must go on forever. It is not a one shot deal. A single transaction of selling a used car or buying a colour television cannot be called a business transaction. Businesses indulge in regular buying, selling, trading, exchanging of goods and services on a continual basis. They are not one time wonders.
4. Profit Motive:
Business is an economic activity. The ultimate goal is to make money by serving customers well—exhibiting ethical, moral and legally acceptable behaviour. If you want to make money quickly or earn a few dollars more by cutting corners here and there—you will be shown the door. Market ruthlessly punishes those who fail to live up to the expectations of the vast multitude of customers and society at large.
5. Risk and Uncertainty:
Customers are notoriously fickle minded. Their tastes and preferences change in an unexpected way. Business may face shortages in supply of key inputs. Power breakdowns may happen. Workers may go on strike. Competition may get intense, cut-throat and high challenging. Government may impose additional taxes suddenly. Future thus is full of uncertainties and turns our bets risky. Businessman might buy large quantities of sugar, wheat, rice etc. in anticipation of festival demand.
All demand might vanish in case the area is inundated with floods or hit by other natural calamities. Unexpected turn of events may bring in misery and cause incalculable damage. The impacts could prove to be suicidal and business may be wiped out completely. A businessman must, therefore, be prepared to face the music from any place and any corner. Businesses could turn out to be extremely profitable or become bottomless pits with no hope of survival due to impacts caused by anyone of the above cited reasons.
A business comes into being because of an individual who dreams big. He takes the initiative, invests funds and sets the ball rolling .The person who recognizes the need for a product or service and bears the whole risk is known as entrepreneur. He visualizes a business, combines various factors of production and puts them into a going concern. He is the key figure who plans everything and gets the business on rails. It is impossible to think of a business without an enterprising entrepreneur.
7. Creation of Value:
Business creates and delivers value to consumers. Creation of utility is the main feature of the business. When raw materials are converted into finished goods, it creates form utility. The goods are transported from the place of production to the ultimate consumers, which create place utility. The process of storing goods when they are not required and supplying them at a time when they are needed is called creation of time utility. At every stage, business delivers value to consumers.
Businesses survive and flourish as long as they are able to meet the expectations of customers. While doing so, they should run ahead of competition and deliver service at affordable prices (remember McDonald’s). Whenever and wherever the customers want those in an innovative manner (remember McVeggie, Big Spicy Paneer Wrap, McSpicy Paneer, Mc Aloo Tikki, Potato Wedges, and Veg McMuffin etc.-mostly vegetarian items for Indian customers).
Definition of Business:
Business, thus, is an economic activity initiated by an entrepreneur. It involves regular production and exchange of goods and services. The purpose is to make money by offering what the customers want. The whole show is run in an environment full of risks and uncertainties of various kinds. Exhibiting moral, ethical and legally acceptable behaviour is essential if the businessman wants to be a long distance runner. Above all, business requires funds and placement of these funds to best advantage.
i. Economic activity
ii. Set up by an entrepreneur
iii. Involves regular-production and exchange of goods and services
iv. With an intent to make money
v. Full of risks and uncertainties of various kinds
vi. Put resources to best use to deliver value to customers
vii. Show ethical behavior to survive and flourish in the economic jungle.
Economic Activity Type # 2. Industry:
The term industry refers to economic activities carried out (using technology and skills) while converting resources into useful goods. Broadly speaking it refers to the activities of extraction, production, conversion, processing or fabrication of products.
The products of industry may be further classified into three categories:
i. Consumer goods- Goods used by final consumers (e.g. AC, Radio, Television, Soap, Toothpaste, Clothing etc.)
ii. Producers’ goods- Goods used for the production of other goods (e.g. Machines, tools, equipment etc.)
iii. Intermediate goods- Goods produced by one industry (manufacturer of steel) are used as inputs by another industry which retails these as consumer goods (manufacturer of toys, fashion and designer items)
Industries may be broadly classified into three categories: Primary industries which extract materials from natural resources; secondary industries which use the products of primary industries and convert them into outputs through manufacturing or construction operations; and tertiary industries which offer services to both primary and secondary industries—namely transportation, banking, warehousing etc. Primary industries may be either extractive or genetic and secondary industries may be either manufacturing or construction.
These are discussed below:
1. Extractive industries are concerned with supplying commodities, which are extracted from earth (e.g. Farming, mining, lumbering, hunting, fishing)The products of these industries—such as oils, minerals—are generally used by manufacturing and constructive industries for making finished goods
2. Genetic industries refer to industries under which plants and animals are grown for the purpose of sale to the consumers (e.g. breeding plants in nurseries, cattle rearing, horticulture, farming, sericulture)
3. Construction industries are concerned with the construction of buildings, bridges dams, canals, roads, etc. and the raw materials that are used by these industries are the products of manufacturing industries. Business provides not only goods but also services. Services industries do not produce any tangible goods. These are engaged in providing services to the public
4. Manufacturing industries are those, which convert the raw materials or semi-finished goods into finished products. Articles of daily use are mostly produced by manufacturing units.
Manufacturing industries may further be classified thus:
Here a basic raw material is analyzed and separated into a number of products. For example an oil refinery separates crude into petrol, diesel, kerosene, gasoline, lubricating oil etc.
In this case two or more products are synthesized or combined to manufacture a new product. Fertilizers, Cosmetics, Paints, Plastics Medicines are manufactured by synthetic industries
Here raw material is processed through different stages of production. In paper industry, for example, bamboo is converted into pulp, and after cleansing converted into different types of paper, (likewise sugar, steel, textiles etc.)
Here various parts or components are brought together to produce a finished product. Televisions, radios, automobiles, air conditioners etc. are examples of assembly industry.
Economic Activity Type # 3. Commerce:
The term ‘commerce’ refers to all those activities that facilitate the transfer of goods and services from producers to consumers. It is an important link that helps producers to get connected to end users. Facilitating services like transportation, warehousing, insurance, banking, advertising, packing help the smooth and easy transfer of goods from producers to consumers.
Role of Commerce:
Commerce helps both groups to overcome the following hurdles:
1. Hindrances of Person:
Traders such as wholesalers, retailers and agents facilitate quick and easy movement of goods from producers to consumers.
2. Hindrances of Place:
Services such as transportation, warehousing help movement of factory output to consumption centres. Packaging offers protection to products and facilitates smooth transfer of goods without any damage. The hindrances of place in the form of distance between production and consumption centres, thus, is overcome.
3. Hindrances of Time:
Since production is undertaken ahead of demand creation, it is necessary to place the final product in the hands of consumers through convenient, nearby stores and offered in economical lots. No one will buy toothpaste in a bucket howsoever cheap it might be. Warehouses help producers to ensure safe storage of products during off seasons and release them into market when there is enough demand.
4. Hindrance of Risk:
During the course of journey from production centres to consumption centres, products may suffer damage due to various known and unknown factors such as theft, pilferage, floods, earthquakes, riots etc. Insurance removes this hindrance by covering all kinds of risk for a reasonable fee. Insurance, thus, facilitates storage and safe movement of products from one place to another place.
5. Hindrance of Exchange:
In case goods and services need to be exchanged on a large scale you require easy credit facilities—that are offered by financial institutions and banks. Easy, safe and speedy payment of money through banks helps businessmen overcome the hindrance of exchange.
6. Hindrance of Knowledge:
Sellers need to let buyers know as to when, where, how and at price products and services are available from time to time. Advertising and publicity campaigns break the news regarding products and services to prospective buyers. The hindrance of knowledge, thus, is overcome.
Commerce, thus, facilitates the removal of hindrances of various kinds that come in the way of smooth, speedy and easy transfer of goods and services— such as hindrances of person (through trade), place (through transportation), time (through storage), risk (through insurance), exchange (through banks) and knowledge (through advertising and publicity).
Economic Activity Type # 4. Trade:
The term ‘Trade’ implies sale, transfer or exchange of goods and services. The basic objective of ‘trade’ is to make the goods and services available to those persons who need them and are willing to pay for them.
1. Useful and Vital Link in Market Place:
A trader usually buys in bulk from producers (known as wholesaler) availing steep discounts and makes them available at an opportune time to small retailers after adding his margin or mark-up. Since producers do not have the expertise nor the time needed to focus on the multifarious needs of scattered and widely distributed small retailers and consumers, they have to invariably depend on the services extended by wholesale traders. A trader thus serves as a useful and vital link between producers and consumers.
2. Originally Trade was in the Form of Barter:
Trade, originally, was always through barter whereby goods were exchanged for goods (wheat for sugar; rice for tea; cloth for grains etc.). Modern trade, however, is characterized by exchange of goods for money. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade.
3. Specialization and Division of Labour are the Principal Reasons Facilitating Trade between People:
Normally traders in the market place specialize in an activity over which they have a grip. Over a period of time, they know how to carry out trade in an efficient and effective manner.
4. Trade between Two Locations because of Location-Related Benefits:
Trade is carried out between different regions because of some location related advantage, like availability of cheap labour, power, materials etc. (like sugar in Maharashtra, Basmati Rice in Punjab, Tea in Assam, Chillies in Guntur etc.)
5. Pivot of Commercial Activity:
Trade is the pivot around which all commercial activity revolves. Services such as transportation, storage, banking, insurance, advertising and publicity revolve around trade. The entire edifice of commerce is built on the pillars provided by trade only.
The various types of trade may be listed thus:
1. Home/Internal Trade:
Home/domestic/internal trade refers to buying and selling of goods with the boundaries of a nation. Payments happen in national currency either in cash or through the banking system.
Home trade may be further classified into two categories thus:
i. Wholesale Trade:
It relates to sale of goods of a specific variety in large quantities. Wholesalers buy in bulk from manufacturers (generally during off seasons) at a steep discount to market price. They sell these to retailers in small quantities immediately thereafter if the demand is good and the price obtained is lucrative. Otherwise, they hold the quantity bought till prices begin to shoot up. Wholesalers, thus, serve as vital links between manufacturers and small retailers
ii. Retail Trade:
It relates to purchase of goods in small quantities from the wholesalers and their sale to the ultimate consumers. It serves as a link between the wholesalers and consumers.
2. International or Foreign Trade:
Trade between nations is called international trade or foreign trade. Payments are made in foreign currency. Goods gain entry into a nation using international means of transport, i.e. shipping or airways or both.
International trade may be classified further into the following categories:
I. Import trade- It means purchasing goods from foreign countries for home consumption.
II. Export trade- It means selling domestic goods in foreign countries.
III. Entrepot trade- It involves importing of foreign goods with a view to re-export them. (E.g. India importing sugar from Africa and re-exporting it to Nepal, Bhutan or Pakistan.
In addition to trade, commerce includes other activities that facilitate the smooth and uninterrupted flow of goods and services from the producers to the consumers. These are known as aids to trade or auxiliaries to trade.
They are as follows:
It facilitates speedy transfer of goods from places where they are produced to places where they are in great demand. Transportation helps producers to overcome the hindrance posed by distance. It creates ‘place utility’. Producers get a good price for their production in markets where there is shortage. Transportation may be via Land transportation (Road or Rail), Air transport (Airplanes) or Water transport (Boats or Ships).
It means holding and preserving goods till demand is created and a good price is obtained. If everyone tries to sell the produce immediately after cutting the crop, prices fall due to oversupply. Warehousing thus, helps producers to safely preserve the produce for a while and release the same into market when there is good demand. It creates ‘time utility’. It also helps in striking a balance between demand and supply. Consumers get what they want at reasonable prices throughout the year. In the absence of adequate warehousing facilities, market may be hit by oversupply or chronic shortage of goods
Business is full of risks. Factory buildings, machinery, equipment, furniture, crucial data/information etc. need protection against fire, theft, natural calamities and many more threats. Materials and goods, in transit or in stock may need to be protected against the risk of loss or damage.
Employees may require protection against the risk of accidents and occupational hazards of various kinds. Insurance offers financial protection in all such cases. On payment of a nominal premium, the amount of loss or damage and compensation for injury, if any, can be recovered from the insurance agency.
Banks offer credit facilities to needy producers at reasonable rates. They discount the bills of buyers and sellers and facilitate easy, safe and quick transfer of money between market players. They also make arrangements for payment in foreign currency when required. The volume of trade in the country, thus, gets a big boost when there is an efficient banking system is in place.
5. Advertising and Publicity:
Advertising is any paid form of non-personal presentation and promotion of ideas, goods or services by an identified sponsor. Advertisements help in awareness creation and idea formation. Ads help prospective buyers to know who is selling what and at what price. Without advertising it is virtually impossible for any manufacturer, now a days, to sell products like mobile phones, television, refrigerator, computers etc. advertising is equally important for services like hotels, holiday resorts, airlines and even state tourism.
The same is true for ideas (family planning) and causes (aids campaign). Publicity is communication about a product or organization by placing news (say a credible story about a new produce/idea or a new fashion trend that the company is exploiting about it in the media without paying for time and space directly. Both advertising and publicity help in overcoming the hindrance of knowledge.